How (and How Not) to Buy a House

Little MM tests out the public park that will be our new back yard.

Well, it’s official: The Mustache Family is buying a new house.

We’re pretty excited, as this is a chance to put many of our favorite values into action. It is a significant downsizing, at 1000 square feet smaller than our current place. This brings the chance to live more efficiently, with less idle space. It’s a bit of a fixer-upper, meaning I get to crank out another thousand hours of good old-fashioned hard work. The size and condition mean that it is $160,000 less expensive than our current house, which will allow us to transfer more of our savings to productive investments (and pay lower property taxes) forever. And it is situated with ideal Southern exposure (free winter heat), backing onto a beautiful public park filled with wide open grass areas and shade trees. This setting will allow us to do less of our living and entertaining indoors, and more of it out in Nature where we belong.

There will be plenty to talk about after we close on this house later this month, do some quick renovations, rent it out for one year, and then move over and sell the main house next summer. But this enticing story is just an example to introduce the real theme of today’s lesson, which is how to buy a house in general.

House buying has been on my mind for most of the past year. We’ve been shopping for our own downsizing residence, making several offers on other places around the neighborhood. Several friends have coaxed Mrs. Money Mustache into using her real estate agent powers to help them buy their own houses. The Longmont property market has heated up to a frothy boil, with the nicer houses selling on the first day after listing. And I’ve watched it all with some interest, noting both the successes and failures on the part of buyers and sellers.

How to Buy a House

You might think that buying a house is just something you do, rather than a skill that must be learned. But the truth is quite the opposite: for the typical nonmillionaire, a house is the biggest purchase ever made, and thus the opportunities for both grand mistakes and massive scores are plentiful.

Mindset: You can start things off by giving yourself a great gift that will make the rest of the process go much more smoothly: a calm and rational mind. Repeat after me: “I am not buying a flowery pillowcase of emotions or a future of warm memories. I am conducting a business transaction to purchase a piece of land and an assembled collection of construction materials.”

Don’t worry, there will be plenty of time for the pillowcases and the memories after you buy the house, but don’t put the carriage in front of the horse. For now, you are a BusinessMan/BusinessWoman looking to conduct some business. The strength provided by this mindset is essential to get the results you want.

Location: Next you choose your location. You need to do this before you start looking at houses, because it is way more important than the details of the structure itself. Beginner buyers often say things like, “Oh, I’ll just live somewhere near the interstate, so that way it’s easy to get anywhere”. Instead, I suggest starting with the assumption that cars don’t exist, and designing a life around that assumption instead. You’ll still have your cars, of course. But your level of need for them, and thus the quantity of money and time you waste sitting on your ass in them, will be completely different.

With a bit of planning, it’s almost always possible to put work, grocery store, school, library, and anything else you need right within the area you live. By looking for public amenities, you can get many of the benefits of a country house right inside the city, as shown in the picture above. The more things you live near, the fewer things you need to own yourself.

Rent vs. Buy: There are a few bits of old folk wisdom that need to be put out of their misery. “Real estate is always a good investment, because it never goes down.” “They aren’t makin’ more land, so buy it now.” “Renting is just throwing your money away. You should buy, because you’re building your equity.”

In expensive areas (homes start at over $300,000), the math often comes out in favor of renting. In cheaper areas, especially with the currently-low interest rates, buyers usually win. In between, there are some considerations that tilt the balance: people who prefer not to maintain their own house should be renters (because the contractors will eat you for lunch if you do things like calling a plumber to fix a broken toilet). People who love customizing things to their own liking might still prioritize owning. But in either case, there are costs: if mortgage interest plus property taxes and insurance alone add up to more than rent for an equivalent house, you are throwing more money away by buying than you are renting.

Fixer-Upper or Fancy Luxury: much like the rent-vs-buy decision, this question often depends on how expensive the target area is. In pricey hotspots, everything sells at a premium – a renovated 3-bedroom house might be worth $200,000 more than the same thing in dated condition. Since it costs far less than 200 grand to renovate a house, you’re better off with the fixer-upper. But there are still many US towns where houses are selling at less than their construction cost*, even assuming a land value of zero. In this case, you might as well get all the quality you need while it’s on sale, since even DIY-renovation will cost more than purchasing an already-nice house.

Ignore the Fluff, and See Opportunity in the Bad: When touring houses with buyers, I’ll often hear things like, “Oh my god, I love this pantry!”, or “Daaayumn.. this place smells dingy.. let’s get out of here.”

Small details like a set of wooden shelves with gourmet spaghetti sauce on them, or an old carpet that has absorbed more than its share of bodily fluids tend to have a big impact on buying decisions, when really they should not. These represent things that can easily be changed, at a tiny fraction of the cost of the house itself. Would you make a car buying decision based on how full the gas tank or the wiper fluid reservoir is?

Pay More Attention to Big Details: For example, which part of the house faces the sun? My pet peeve is houses that have little windows peppered into their exterior with no regard for what sort of heat and light they will let in. If you live in an area where heating is a significant expense, you want a house oriented on the East-West axis with a large area with lots of windows facing the sun. If you are in a hot climate, you want something with large roof overhangs and some shade. How efficient is the furnace, air conditioning, insulation, and water heater? These things make a difference of thousands of dollars per year, which makes them more important than most other home features. And good solar exposure and window placement can make for a happier living environment in general.

An interesting question is whether size, or square footage, is really a big detail. According to traditional real estate agents, it is one of the biggest. Square footage, relative to other houses nearby, is the biggest factor that goes into setting a listing price and doing appraisals. But as a buyer, you can safely ignore it. More important is, “is there a large enough common room for my family and friends?”. This can happen in an 800 square foot house, or be oddly lacking in a 3500 square foot one. Our “new” smaller house, for example, will be almost as useful as our current place, because a big chunk of the missing space is stuff that isn’t really living space anyway (hallways, staircases, an overly-big master bedroom, etc.) The new house is all at ground level, which makes for an efficient layout.

Take your Time: For the past eight years, I’ve researched every listing and every eventual sale in my area, so I’ve soaked up the market on a fairly deep level. Within the span of any given year, I see houses sell at both ridiculously high, and ridiculously low prices, given their quality and size. The market is hot in summer, cool in winter. And there are frequent random events, like a bank dumping a foreclosure at $100,000 below market value or an estate sale with an out-of-town realtor setting the price way too low.

Given the large sums involved, it makes a lot of sense for a home buyer to plan to shop for six months or more, rather than rush to find a house during a brief window of a summer vacation or a weekend househunting tour. If you spend 50 hours researching houses, but save $50,000 on a purchase because of it, what is your hourly rate?**

Move Fast when the Time Comes: You found a great house, and you know it is underpriced. Do you go away for the weekend and think it over, then maybe try to set up a showing next week? No. You tour it within a few hours of its arrival on the market, and you make an offer before you eat dinner that night. Good deals go quickly, so if you want one yourself, you must be even faster. Earlier this year, we found one of these bargains and had our offer in within 8 hours of listing time. We lost it to another person who only took 6 hours.

And that’s it! Sure, there are plenty of meat-and-potatoes details missing, but you can get those from a real estate agent who is trained for your own city, state, and country. This guide just represents my idea of what seems to be missing in the process for most beginners.

House shopping is much like car shopping: as soon as you train yourself to look beneath the superficial veneer, you gain a huge advantage in the marketplace. So good luck.. and maybe I’ll see you at the party in the beautiful park that is my new back yard later this month!

* I find that building a house in the US costs between $100-$200 per square foot (in the average-cost Denver metro region), depending on quality level. So a 2000-square-foot house selling for $150,000 is an unsustainable bargain – the prices will have to rise on these someday assuming eventual demand, because nobody can make more at that price. Omaha and areas near Dallas seem to have these amazing sales, among other places.

**One shortcut to this is if you can find that rare ultra-sharp, patient, analytical real estate agent to provide the market intuition for you. But these are 1-in-100 in my experience, and unfortunately Mrs. MM is not looking for more business :-)

Another big shortcut is to strive to avoid wasting time: your own, the seller’s, and your realtor’s. So you start by getting all your information online – reviewing all available pictures, scoping out the area with Google Maps and Street View, and doing a walk-by inspection of any potential house.. all before setting up a showing. Only if you can still imagine buying the house at this point, do you bother committing to a tour, an act which involves consuming about 8 hours of other people’s time, and should thus be taken seriously.

“Ignore the Fluff, and See Opportunity in the Bad… Daaayumn.. this place smells dingy.. let’s get out of here.”

What if that smell is cigarette smoke? We toured a house that we would have loved, except that it smelled like it had been used as the barracks of the Phillip Morris Army for 100 years. It smelled like this *after* it had been remodeled (refinished floors, new paint, new carpeting, no furniture in the house). We noticed a doorbell fixture that had clearly not been part of the remodel, and it was coated with that lovely yellowish tar coating that only long-time passionate smokers can produce.

My grandpa passed away several years ago. He was a smoker, but my grandma (still living) was not. After he died, they did everything to get rid of the smoke smell: new carpet, paint, furniture, window treatments, etc. My dad says that you can’t smell the smoke smell anymore… except when it rains or is really damp outside.

That story scared me enough to pass on the house. (That was the main reason; the other was that half the basement was consumed by a four-foot tall slab of concrete [think a crypt or tomb] that no one could explain.)

love reading your blog and the smart comments from younger people who are making such good decisions about their life and finances.

I am a 68 yr old woman, widowed extremely young with 3 children. I have a high school education and lived on social security while my boys were growing up. Later I went to work but with no degree never made a lot of money. I am still working and make $44,000 yearly but am now collecting my deceased husband’s social security. Lucky for me I live in the city I was born in and several months ago moved into a 28 apt bld that is for women only. You must be 60 yrs of age and a resident of this city to apply. It took almost 3 yrs to get an apartment of 3 rooms; living room, 15′ x 10′, bedroom 13′ x 10′ and kitchen, is about 9′ x 9′ total, and a lovely tiny bathroom. It is a little piece of heaven! My 87 yr old mother is only 1 mile from me, 15 steps from my door starts a river walk on the Charles river (I am outside of Boston) and 5 steps from that is a wharf where people fish and boat. This was built with money a generous lady left for other women of lesser means to live and the cost of my rent is $450.00 monthly. Yes, that is what I said, $450, and this includes all utilities but not cable. A sum of $15,000 was put up front which is nothing today. Rents in this area are huge. If you can find an apt. for $1,000 a month (with no utilities) you are doing well. My joy is boundless over finding this hidden gem at this time of my life.

Others need to listen to Mr. MM and follow his example to live a simple life and the joys can be many.

MMM: You forgot to put (high crime rate) after your “beautiful public park” text. Also, you forgot to tell people to shop around for a realtor. I purchased a home in March with a realtor credit of $2500 which was a significant savings.

Shopping around for a realtor is a good idea. The higher the purchase price, and the lower-maintenance person you tend to be, the lower percentage commission a smart realtor would be willing to accept.

As for crime rate: that might apply in some areas, but there is essentially no crime where I live. Locking up your house/car/bike seems like a quaint old concept to most residents of Old-town Longmont. If you check out the data in Freakonomics you might notice that crime has been dropping nationwide for quite a while.

Regarding realtors, a buyer’s agent seems to have little incentive (above the possibility of the deal falling through) to help buyers zero in on a good offering price, or haggle down a seller from their asking price. Both of those nuanced efforts, which may yield a not-insignificant difference in the sale price of the house, chip away at their commission. Though I’ve only bought one house, I came away from the experience thinking I should have “lied” to our realtor regarding our price range – on the low side. Is this a common complaint on the buyers’ side, or did we just have an incredibly un-invested buyer’s agent?

My agent definitely only wanted to show me places at or above my upper limit. (To be fair, my upper limit was just over half the median price and I didn’t want a fixer-upper.)

I resolved that next time I would give the price I actually was hoping for instead of my maximum and/or try negotiating an up-front fee of their normal percentage of the figure I give them plus an additional percentage of the money they save me. So, for example, I could say I want to spend less than 150K, and I would like to pay them 3% (if that’s the going rate) of 150K plus 1% of every dollar less than 150K that the house costs me, included repairs noted in the inspection. Do you think they would go for that?

While shopping around for a realtor is a good idea, looking for houses without a realtor is an even better idea.

MMM, I was disappointed to see you didn’t list the option of buying without a broker/agent as the most mustachian option of all!

If someone is ready to take a power tool to the property she is about to buy, certainly she could pass on the hand holding and the offer from your typical agent to be driven around in their fancy pants Lexus looking at houses. I am sure Mrs. MMM provides great service to folks, but buying real estate via brokers is a dying, wasteful model.

Saving up to 6% on a purchase in the six figures is quite a cost savings. I’ve known several folks who have negotiated with sellers and/or their agent to get a lower overall buying price in exchange for not using a middle man. One of the biggest misnomers in real estate is the myth that “the seller pays both agents’ commissions.” While this is technically true, it is certainly also driving up the overall cost of the house being purchased. I say be your own Mustachian real estate agent.

You are correct, MRE! I have bought two houses that way too – shopping without a buyer agent. And now, of course, we are our OWN buyer agent, which is the same thing.

The only catch: sometimes the seller’s agent will simply jack up their share instead of passing the savings on to their client. Also, there is some advantage to knowing the details of real estate law for your first deal – once you’ve been through it all once, it is more sensible to take on the role yourself.

If you’re a do-it-yourself type who is able to do the research and make big deals while remaining calm, buying and selling with a discount (or no) broker can be a great idea. In my ideal world, all houses would just trade hands on Craigslist :-).

No.. it’s actually a tax disadvantage to rent it first. This is just to give us a chance to get some things fixed up, and get our current place ready to sell. And to make sure we’re not crazy for making such a big decision :-)

We’ve actually been extraordinarily lucky when buying homes. We had some of the same thought processes when we bought our first home, but not all of them (we were only 23!). But we had an A+ buying realtor that showed us some great tricks and things to think about. We actually bought a home very young because renting costs were absurd where we lived.

Oh, and we have bought all our homes in December and sold them all in spring. OF course! The pattern I have noticed over and over on low selling prices is a really bad selling realtor. Generally not properly marketing the house. Somehow we always end up finding these little gold mines that everyone is overlooking. The first home we bought had actually sat on the market for 6 months in a market known for “six figure above asking price” bidding wars. IT was also remodeled to the hilt and move-in ready.

One final tip: Never assume anything. We bought a small condo in our crazy high cost region and then ended up making a lateral financial move to a “dream home” in a less expensive city. We had perused some home models, and they were by a mile the best value. People always assume we are hoity toity because we bought a new house (& obviously bought such a fancy condo too). The truth is they are hoity toity because they paid HUGE premiums for “old neighborhood charm.” Both our condo and this home have been extremely practical purchases. We aren’t overly handy types, but both have been quite low maintenance. When we bought this home it was also an “Energy Star” home. I half listened to the sales people and didn’t think much about it. But, then we got our energy bills – holy cow!! People regularly ask if we pay $300/month for the gas/electric. I laughed one time when someone was going on about that – our gas bill was $10/month at that time. Our home is extremely energy efficient, so that will be a must for our next home. & it’s not solar/crazy expensive gimicky type stuff. For example, we have a tank hot water heater – it’s just crazy efficient and cheap to use. We have been in house for 12 years and still have most of the original light bulbs – the CFLs and LEDs aren’t as impressive. We live in California so solar might be great in the long run, but just not the most cost efficient at the moment. I am not even sure we’d save anything, our electric bills are so low. The house harnesses the sun in winter with window placement and other more cost effective energy savings (most of it over my head – but the roof and the insulation and so on).

Good post! One question for you: why are you planning to sell your current house, rather than rent it? You personally enjoy managing rental properties. You said that Longmont offers attractive rental returns, and neither stocks nor bonds are particularly cheap by historic standards. So, why not just enjoy the rental income and possible further appreciation?

We are thinking of downsizing also, but are facing a “well” dilemma. Water is very expensive here (desert area in Nevada). If we move into the downtown area we’ll be very close to everything, but we will have expensive water bills. There are some houses (about 4-5 miles out of town) which have wells (nearly free water for life, just have to pay for the electricity for the well pump, and that can be taken care of with solar), but are not nearly as accessible to the library, thrift shops, etc. However 4-5 miles IS still bike-able, but less convenient. I ride almost everywhere, but the wife (with two small children) still takes the car a lot. I’m curious what MMM would think of this dilemma.

I would say that the wife needs a family bike. Search “Emily Finch bike Portland” to see how a mother of six does it in the PNW. 4-5 miles is not an unreasonable distance to drive a car, if not done several times per day. The cheapest way to live that I have found is no vehicle in a place with awesome public transit (like Chicago). 200 steps from our front door there is a bus line which has a bus come by every 3 minutes during rush hour, and every 15 minutes even in the middle of the night. With a bicycle (which is faster than a bus), I can ride to the subway train station in about 8 minutes and then ride express subways to the center of Chicago in about 12 minutes. Once there, I can walk or ride a Divvy Bike anywhere I want to go. Winter in Chicago sucks, but summer in Tampa sucks, too. We have a 600 SF cute studio condo with a Murphy bed in the best neighborhood in Chicago. Out the front door is a 1000 acre park. And it costs $183.00 per month in HOA fees which includes cold and hot water, sewer, trash, basic cable, and heat. Taxes are $1200 per year. Insurance is $350 per year. Gas and electricity are about $50 per month. The total cost of ownership is less than $400 per month….utilities included. An unlimited bus and train card is under $100 per month. So, we can live there for less than $600 per month….but it gets better….we rent the condo to a college student for the academic year and spend summers there. By doing so, we avoid our home state of Florida in the summer rainy season (think terrarium) and the college-student lease pays more than the cost of the entire condo. We put the dividend into improvements on the property and show no income…and have a VERY NICE place to summer-over until the weather cools in the sunshine state.

I’ve always bought a house with good “bones”, but got bit by that on my last house – I just never got around to fixing things up – they worked, they functioned properly, but they looked butt ugly – then we tried to sell it… We were able to fix some things up after renters moved out, but not enough to get a price premium with other houses in the neighborhood which had upgraded to granite and stainless, etc. We have a lot of things we want to do to our current house too, but it’s not getting done because everything’s functional…

I started looking at waterfront property in the Northwest in 1974. I probably looked at 100 places at that time and we ended up buying some waterfront property a year or so later. But I continued looking and we lived several other places. Then in 1986 I started a serious hunt for waterfront again. Lots of stuff happened but we found the perfect place where the owner hadn’t managed his money well and needed to sell. We were frugal so we had the money to buy. We have 1700 square feet with a southwestern exposure with large windows to let the sun in. This perfectly placed house sits on four acres of low bank salt waterfront and is all paid for. The trick was that I was always looking at real estate (sort of a hobby) so I knew prices and what pitfalls to be careful of with waterfront. When we found our house we asked the realtor to meet us there with all of the papers and we were able to make a cash offer immediately after seeing it. We had the confidence to move fast because I had essentially spent 12 years looking. Other then marrying the right person and my staying home to raise our kids, our house purchase has been the best decision we’ve ever made.

Awesome, congratulations on the new house! I’m happy for your and your family and it sounds like after 8 years of research, you found the RIGHT house for you. I think it’s smart to do research, wait it out and be financially ready to buy a house. I bought my on an impulse right after college and while I love the place, I spent WAY too much and am still paying WAY too much now. I wish I had waited so kudos to you. And thanks for the advice, next time I’m waiting until I’m debt free and can afford it outright. I also like your ideas of getting a fixer upper instead of a new fancy home right away. Excellent advice to those buying now! Keep up the awesome advice, my favorite is the $10 iPhone plans. Briliant.

Very timely article as we are just starting to look for a house. The good news for us is that we are moving back to the small town we grew up in and we know exactly where everything is. We are definitely choosing a house that is walking distance to everything. The only one we have seen the inside of so far was built in 1910 but was in immaculate condition!! The only thing that stopped me from putting an offer in immediately was the fact that they closets were tiny and few. We have since been brainstorming about turning one of the four bedrooms into a closet/dressing room and now we very well may put in an offer. We are in no hurry and plan on offering at 20-50k less than asking price, just to see what happens. Asking price on the 1910 house? $165,000.

We recently purchased our second home and went through all this analysis. We really didn’t want suburbia, but home prices near my work were way too expensive. My husband job is 22 miles away from my job so we split the difference and moved to the middle, right off the interstate. The schools there are way better for our two young children. We rented out our old house (1,300 square feet.) Our new home is 2,200 square feet and will fit all of our needs for the next 15 years. Due to the ups and downs in the market, and the interest rates, we are only paying $120 per month more for our new home (including increased HOA) than our old home. This one is more energy efficient and utility costs are pretty similar. In the end, this fit us, but we can’t wait for the day when we can downsize again. I’m also working on getting a job closer to my home (in my home would be ideal.)

Another great article from the MMM thanks for the info! My wife and I were thinking about buying a new home this past spring when our First Time Home Buyer Tax Credit restrictions fell off at our 3 year mark. With my commuting 1 hour each way to work everyday we felt it just made sense to move down closer to work but because we already own our Town Home we were planning on just going right ahead and buying our Single Family home we would live in for ever. Thankfully we came to out senses and will be staying in our 2 bedroom town home with our 500$/month mortgage and save boat loads of money we would have wasted if we took the plunge and purchased a single family home with our family just being the two of us.

Hi,
Wallet Engineer (formerly #1, but above Wallet Engineer retired. He since bought a new house, put in some sweat equity, and rents out the one mentioned above. And they had a baby.) here.

Ostensibly I bought a home because the Rent vs. Buy calculation come up with BUY. However, I also wanted the space to garden and customize as well as a place that feels solid, a long-term base of operations.

Stop by for a drink. I’m a few blocks over. I’d love to make your acquaintance.

One question – do you know of a rule of thumb for the various costs associated with moving house, not counting the broker commission.

I have only moved houses once, and it seems I was continuously opening my wallet for various “necessary” things over the first couple months. If someone tied up all their liquidity with the down payment, it seems they could have some problems (if they are non-Mustachian and spend most of their paycheque…).

Hi MMM
I am following your blog for several months now, and am amazed over and again by the degree of alignment with your views. Usually not much to add or disagree, so this is my first response :)
While I agree with all your statements and advise, I would want to add a few hints I found to be useful in my own real estate transactions (5 in past 10 years, 3 of them in the US):

1. try to acquire basic knowledge of building structures and equipment, to be able to look in the right places to quickly spot possible problems. This avoids relying only on a paid-for inspector, after you have fallen in love with a place.
(I have found that inspectors can be both sloppy, or overly conservative, in their advise)
Or get a friend or family member to help you.

2. Maintain a detailed list of all issues you find during a walk through, and make/get estimates what it costs to fix them. This will be very helpful to rationalize the buying decision (incremental expenses!), and in price negotiations.

3. Know your market, and develop a healthy “gut feeling”:
Invest a “brute-force effort” of at least 1-2 weeks to scan all transactions of the last 2-3 years in your target area. Online tools like Zillow are invaluable for this.
Drive around neighborhoods in your target area. Look at as many houses as possible, at least from the outside. Make occasional appointments to see a house even if you are just mildly interested.
Only then find “your” realtor (you will likely have met several in the process, and can select the one you trust most)

4. Listen to your gut.
Don’t consider a place where you or your spouse have an uneasy feeling. You will likely regret it later if problems arise, no matter how rational these regrets are. And there will be problems after you bought a house. Always!

5. Buy below your means:
Don’t buy a place that maxes out the financing your bank gives you. Rather leave yourself comfortable headroom for a sufficient down payment plus early out-of-pocket expenses after the closing (renovation, unforeseen repairs).

6. If you don’t intend to retire in your home:
Buy a type of home where there is continuous demand in the market, no matter how bad the economy is. This will ensure you can sell quickly and without a loss, if you ever have to. Especially important for those of us that are still in regular jobs.
What I mean by this is a style, size and location that is preferred by “regular families buying their first or second home”. In the area of the US I am in, this would be a 4 bedroom, 2.5 bathroom Colonial.
It should be in a neighborhood with good schools, and not in an obviously disadvantageous spot (e.g., behind a mall, on major roads, at a rail track etc)

7. Avoid “unusual” or “too fancy” places, unless you are absolutely certain you never want to sell. This is really similar to advise no 6: don’t fall for a “architect’s house” or grandiose custom-build castle. It is a matter of taste, and what you (and the original owner) like may not be preferred by 90% of the population. So too unusual homes narrow down you potential buyer group significantly, especially if the economy is bad and people who don’t “have to” buy a house hold off.

8. Look for “burned houses”, i.e., places that are fundamentally attractive but have been on the market for a long time due to obviously too high asking price. Then go in with aggressive offers (more on that below).
Not sure this works in all markets and under all economic conditions, but it sure did for me.

9. Look for attractive, yet (in your personal judgement) overpriced houses, and go in early with an aggressive offer.

10. Last not least: Be aggressive with your offers, and don’t listen to your realtor that wants to tell you “not to offend the seller” and “not go in too low”.
Instead, be diligent in your preparation to determine a reasonable market value, factor in any necessary repairs or improvements (see topic 2.), and offer exactly that (or a fraction less).
No matter how much this might be below the asking price! Be patient and polite. If the opportunity arises calmly explain the seller’s side your position.

Either of three things will happen:
a) The seller turns you down and finds another buyer that didn’t do his homework. Bad for him, good for you.
b) The seller surprises you by accepting your offer, or with a reasonably close counter.
c) The seller comes back to you later, after he has learned that his asking price is really too high and your offer is still the only concrete opportunity he had.
All three things have happened to me in the past, and have worked well for me. Surprisingly, every time the realtor tried to talk me out of this.

Sorry for the longer than expected writeup, but I felt these topics might augment your excellent article….

Awwwww, I’m gutted!!!!!!! I just finished reading the mmm blog from start to finish and now there are no more articles for me to read (boo hoo). Of course there will be the new ones as time goes by, but not quite the same as devouring mass amounts of awesome articles at a time!

Thanks for the brilliant inspiring work mmm and looking forward to your book!

Thanks for another great article MMM. I was eagerly checking nightly! I’m always amazed at the cookie-cutter homes in our area where it appears the builders pay absolutely no attention to the sun or the cold winds, placing the garage and no windows on the south side. Even building 2×4. When I built my new small house (in Iowa-a state which is more cool than warm) we paid attention to the south lighting as far as placement of the house on the lot, placing lots of windows on the south side. We tiled the floors for passive solar (and easy cleanups at parties!), put the garage on the NW side to block winter winds, used 2×6 construction for extra insulation, which was only $1,500 more than 2×4, put in a wall water heater and a corn stove for heating (by code we also had to install a furnace, which does run on days that go below zero. Our size corn stove cannot keep up on those days). I received several significant rebates for energy efficiency. My utility costs were lower than my 1100 sq ft 1979 built home. Our house is ~ 2200 sq ft including a finished basement. We have more than enough room with our open floor plan. We’re now adding solar due to some awesome rebates this year. How often do you put yourself on the line for hundreds of thousands of dollars? Like MMM notes, there are lots of considerations which are far more important than the color of the carpet.

Bingo! This was exactly my mindset when I bought my house 4 months ago, even though I am scared to say this, I think it worked out well! My house just appraised for 3x what I bought it for, and after factoring in renovation costs, (assuming a buyer could be found since the market where I live still is not great) I would more than double my money! Hopefully things continue along the same path, and I am praying that when we move in 5 years we are able to keep our heads and score another good deal on a house. Thanks for another great post!

Well done, MMM, on both the downsizing and the excellent post.
It amazes me as well how many buyers cannot see past ugly paint or carpet or other easily fixable items and pass on otherwise good houses and excellent values, but it also amazes me how many sellers don’t make the effort or spend the relatively small amounts needed to declutter and really clean the house, pull up ratty carpet, ad some new paint, etc., money that would pay for itself several times over.

Congrats on the new house! Are you planning on selling your current one or renting it out? The rental market right now is great. We live in Greeley (for only a short while more) where you can find those great housing prices of $150k for 2000 sq feet, sometimes even better deals.

I would also add that mortgages suck especially for the first 10 years. If you are planning on selling a house within 5-10 years of buying it, it MAY be better to just rent since a mortgage is almost entirely interest for those first years (depending on 15 or 30 year). The best is to side-step the whole mortgage scam all together and buy outright.

We are “retiring” as well in our early 30s to live on our investment income. We are moving to the Caribbean to start our new adventures. We didn’t want to just “live” cheaply (by staying in our hometown), but to live richly experiencing the world.

We figure we can do it on a budget of only about $1000 a month (probably even less) since our property in Puerto Rico is on 4 acres and taxes are only $40/year (!!). We will be able to grow most of our food and have zero heating costs and can walk/bike nearly everywhere. With the ocean just down the road this sounds just about perfect for us especially since we are leaving Office Space-style jobs. Ahh the taste of freedom is sweet.

We move in less than 3 weeks and we are psyched. It CAN be done. Keep up the good work reminding people of this.

I was one of the lucky* ones in Las Vegas that cashed in during the insane housing crash that hit the Vegas valley. My lovely 1350 square foot house that was built and sold in 2005 for 283k I bought in 2011 for 93k (!) Houses are how being listed in my community for about 150k. I thought this was going to be my “starter” home, but after getting punched in the face multiple times, I realize this will be my “forever” home. Cheers.

*And by lucky I mean that I saved my money, paid my bills on time and was able to qualify for a mortgage during a tough loaning environment while making a modest $20 an hour

Great post! I discovered your blog a few months back and have read every entry. We bought our money pit 6 years ago toward the end of a boom period in Edmonton. Ended up with a 90 yr old house in a crap neighbourhood, but the boom put most of the city out of reach, and we were in the process of being approved to adopt and needed a home with a few bedrooms – which would have made for an astronomical rent. We had a home inspection done, and the inspector called our house “a gem”. Well. The gem has cost us $60K in reno’s so far. We plan to sell in 2 years and know we’ll never recover the loss. Our big lesson was the age of the house (shoddy workmanship, crap materials – including horse-hair insulation between the plaster ceiling and the roof), and the fact that the previous homeowner did his own work (shingling over a huge hole in the roof, without structurally reinforcing it, for example). We will NEVER buy an old house again – poor building code, poor materials, and generations of home-owners before you who took shortcuts with maintenance and repairs.

Nice! We had a great time buying our first house this year. A few more tips we learned on the way: Get a good inspection done. $300 turned into a $10,000 credit for us for asbestos abatement, new furnace, and electrical repairs. We got a killer deal from the get go; the house was being sold by a relocation firm and they just wanted it out of their hands. Ended up $85,000 for 1800 sq ft (plus that nice little credit) for a house that was tax assessed for $135,000. Which of course we just had the county reassess it, and that will save us $1000/year. Following that up with the 2.5 pct 15 yr mortgage, and I’d say it was a pretty sweet buy.

Thanks for this post. It couldn’t have come at a more opportune time for me, as I am currently looking to purchase my first home here in the Phoenix area. This market is popping right now, and I’m trying as best I can to catch the wave on the upward swell. Looking at trends it seems Phoenix is really turning upwards at the moment, so I’m a little concerned about paying too much for something since it is indeed a seller’s market at the moment.

Your words of advice have really made me take a step back and reconsider my priorities. Thank you for that.

This is a wonderful article. This is a very comprehensive discussion of what it really takes to buy a house. I’ve bought two and sold them already but if your blog was available a more than a decade ago, I would have profited much more. Thank you for posting really helpful advice especially on real estate and most especially on frugality. Congratulations on the new house!

Ha ha, yes! I live in Auckland, so can hear you loud and clear! I’m thinking we should look at moving to the USA!! We are paying a heck of a lot of money for the “lifestyle” that we are told we have here in NZ.

We’re in Hamilton, NZ so don’t have quite as bad a housing market as Auckland but our place still set us back considerably more than 300k (~400k for 3bed, 2 bath, 170m2 on 600m2 section). That being said, I’m happy to pay the premium for the NZ lifestyle. Just got to make the savings elsewhere.

I live in a country where open houses are something uncommon but still RE agencies charge around 6% + VAT of a commission.

4 months ago my mother decided to sell her house to which she delegated me to sell.

I bought a domain for 8 dollars, used my hosting services (which i already had used so 0 dollars here) and since I’m a good photographer even though i’m not a professional, i took great pictures of the apartment. Set up a nicely designed website, plus Facebook page paid 30 bucks for a listing on a RE portal, and spent 100 dollars on Facebook ads targeting people in the area of the house aged 25+

In a matter of 2 days I had 45 showings, and got an offer right away. I got a lot of calls from annoying agents that contacted me through the listing to try and snatch the property for their listing.

I did a better job than probably 99% of agents in town so I told why would i need their services and pay them 25k when i was only paying 150 dollars for the job

Mortgage is 100.- CHF a month, 110sqm. I should be able to rent half of it for about 500.- until I have a familly.

It has a wood heating, i should need about 6 steres a year for 120.- each
Only downside is that I’ll have to bike 20km and 500m up every evening. But that should be for only 1 and a half year, then I find work in the village or nearby.

Some friends and I rented a beautiful house together last spring. We have a very nice fenced yard by Providence, RI standards, but the side yard spills into 300 acre Roger Williams Park. If you are even remotely social, this is an awesome opportunity. Our summer parties have been an outstanding success. One night we set up our church’s movie screen on our property and showed “Goonies” to the park. I was shocked at how many people sat down and watched with us, and was honestly a little nervous about police attention. We’re hoping to do “E.T.” next week.

Anyway, the park next door is a huge opportunity for almost free entertainment.

And best of all, the good people of Providence pay to mow what is pretty much my lawn.

I’ve struggled with the notion of buying a new house for a few years now. Opportunities in South Western Ontario (and in Canada in general) are not easily exploited. My current financial goal is to have $1M in net worth by age 40 – the “Freedom 40 plan”. Trying decide if the quicker way is through continuing to plug away at the savings, or re-leveraging into a new real estate situation.

The Stats:
36 years of age. Married with 2 young children ages 6 and 3.
Combined household income of approx $150k.
Total Net Worth approx $650k

The Dilemma:
We currently live in a 7 year old 1600 square foot home. When we purchased the house, my wife and I were very intrigued by the unique design (stone construction,….etc), however did not factor in that we would eventually have a family and would potentially need/want more space. We ultimately sacrificed square footage for quality finish. Fast forward to 2013……..2 busy children and a large chocolate lab. While it seems ungrateful to be complaining about 1600 square feet (especially considering that I grew up in a family of 6, and in a modest 1300 square foot home), the fact is we WANT (not necessarily need) a larger space. On the other hand, I also WANT to reach my $1 million goal. So the question is, do we keep the house and plug away at the savings/investments, or purchase the larger home and hope for greater appreciation? Which one will get me to my $1M goal faster?

Any new house that we purchase will likely be in the $500-600k range which means that I would potentially have to dip into my “non retirement” (i.e. non 401k/Pension/RRSP) savings, and even then, my mortgage would increase to the $200k range.

Am I crazy for touching my savings, which currently generates around $11k-12k in annual dividends, and would also carry significant tax implications when redeemed? Probably crazy, yes, but I don’t want to be short-sighted about the potential long term real estate gains. Also — and more importantly — any property that I purchase would be a slightly outdated “Fixer” (i.e. a $500k home in a $750k neighbourhood) that I would add my sweat equity to. This is my value-add proposition/argument for going the real estate route vs the savings route. Most of my blue collar family members have made their money primarily in real estate. My brain tells me that times may be different and I shouldn’t fall victim…………but I don’t want to miss the boat either!

Congratulations on having such a high net worth at such a young age. It’s hard to offer advice in your situation without knowing your saving/spending rate. If you’re saving, say, 50% of your earnings and your current assets are appreciating at 5% a year, you’ll hit your magic number in three or four years. In that situation, it would be nuts to have so much of your assets tied up in real estate… presumably you’d want to retire (even with the kids being small) into a smaller cheaper mortgage-free house, and live off the proceeds of the investments. Also, remember that the alternative to the expensive house that will appreciate more isn’t the cheap house that appreciates less… it’s the cheap house PLUS your other assets, which will probably appreciate at the same or greater rate than real estate alone.

“How efficient is the furnace, air conditioning, insulation, and water heater? These things make a difference of thousands of dollars per year, which makes them more important than most other home features.”

We purchase homes (though not purposeful, they’ve all been foreclosures), live in them for at least two yrs, fix them up, and take the profit and move on to the next.

We look at a few things differently.

I agree that location and good bones (foundation, siting, floor plan-or one that can cheaply fixed- etc) are everything, but land is tricky. Too much, esp in the wrong places, and your costs and time are sucked up and buyer pool limited. Too little, esp in the wrong places, and future buyers will balk. Esp if it affects privacy. There’s a sweet spot for land, and it tends to be in the .5 to 1 acre range.

We pick homes in the 1500-2200 sq ft range to appeal to the mass buyer, and I get that you’re not buying to resell, but one day you might resell, so it’s sort of nuts to me to underpurchase or overpurchase and not get the best return.

We also love places that have inefficient systems and windows. The prices reflect it, and we’ve made connections that enable us to put in new systems that not only save us sig costs while living there, but make us excellent profit when leaving-because buyers like you want to buy that home with efficient systems.

For ex, we bought the 2100 sq ft house we’re in now in 2011 for $200,000. We replaced all the orig systems and windows/patio doors for approx $10k, and did cosmetics and appliances for about another $10k. We did most of the labor ourselves, got awesome deals, and you’d never recognize the house from what it was.

Our next door neighbor just sold at $323000. It’s not updated as ours is, and it’s smaller. And yes, we sell via auction. It’s insane to do otherwise, imo.

So, my point is bring me the inefficient. Bring me the crappy. All I demand is a low price, sound foundation, great location, lot and size home. Everything else I can work with.

Houses from the 20’s have about 3500 sf lots.
Houses from the 40’s and 50’s have about 5300 sf lots.
Houses from the 60’s and 70’s have about 6500 sf lots.
Houses from the 90’s and up in housing developments are back at 5300 sf, but they are 2 story homes.

I would love to hear some detailed thoughts on negotiating and dealing with real estate transaction costs (closing costs and realtor commissions). Obviously someone with a realtor’s license needs to be involved in the transaction but the principal-agent conflict with realtors has been well documented in Freakonomics and other sources. Maybe Mrs. MM could chime in. Any tips for selecting a realtor when relocating to a new town? What is the best way to determine if a realtor is good/bad, analytical, or just a slick salesperson? Is there a reliable litmus test? Seems like you have to put in the time and effort to become the expert on your particular locale and several posters have suggested ignoring certain advice from your realtor. Yet you still have to pay the realtor this huge fee.

Interesting article, but what’s also interesting is how different the US market(s) must be compared to the UK situation.

Why did you lose out on the house that you took 8 hours to consider? Couldn’t you have just bid more than the people who only took 6 hours?

Where I live there is generally a free-for-all viewing on the first Saturday after the property comes on the market with maybe 20 people looking round. Then on the Monday everyone makes their offers and it’s sold, usually to the highest bidder or they might take less from someone with no house to sell.

Love it. I’ve asked so many friends, family, and real estate agents what are some of the basics I need to know before buying a home and I’ve never gotten anything close to this. Because I’ve never felt prepared, I’ve avoided it my whole life while tons of my peers are buying homes and making me feel late to the game.

But, I’ve also avoided getting stuck. Growing up in Hawaii a lot of friends who did get sucked into buying homes can’t get off the island now. They can’t take that great new job offer, they can’t move closer to family, and worst of all they can’t sell it for what they bought it for a few years back.

So…thanks for giving me a new checklist of things to consider when I find myself back at the buying table.

This article is just about a month too late for me, but I recently used the insights I’ve gained from MMM over the past year or so to buy a 1 story 1100sf house (rental property) for significantly less than the market price. It was an estate sale, the family wanted it gone YESTERDAY, and I was lucky enough to have cash on hand. I made my carefully-considered lowball offer, and it closed within 2 weeks. It ‘s in decent shape, just needs pretty-fying, but my boyfriend & I can do the bulk of that. The only major expense is a new gas furnace. Even though I could get another year or two out of the old one, I’m putting in a new 95% efficiency furnace because it’s eventually going to be my primary residence. Thanks, MMM! :)

Really interesting to read your opinions about buying a home.
I’m a student now and looking forward to buy myself a apartment, BUT i live in Norway. Prices are ridiculous. 35 square meters for 328 650 USD is a minimum, that or a rental for about 1315 USD a month. That price is high even for me with a Master of Science and 110 000 USD in assets. My first annual salary will be 85 000 USD, so I guess I’m in the high income group your aiming for. Any thoughts? I cannot really find a good solution… I could live in a caravan, but I will have a high income compared to the average Norwegian. Buying a home should be easy…

Tommy, I worked on assignment in Oslo and Kongsberg with a colleague who was living in Kongsberg for several years. As an American I can confirm your high cost of living. Also noted the queues in the post office and liquor stores. But we enjoyed the dark Aas!

It was great to read an article that included a “pro-rent” bent to it.

We have found that it’s great for us to rent — it’s usually much less expensive (we tend to choose “very good” neighborhoods), and we can change whenever our housing needs change, and we maintain what we need to maintain (with permission/discussion from the landlord).

And the great thing is that we can just go. We are moving to another country, so now we can just go. It’s nice. We gave our 30 days notice and that’s that. No worries about selling the place, etc. Just give notice and go. Works out great.

Buying a home that backs onto a park, lake, golf course, forest, etc is usually an excellent decision. These types of homes give you an extension of your outdoor living space and can often provide you with added privacy by having know one live behind you.

We just recently purchased our home that backs onto a conservation area and the privacy that we have gained by not having any homes behind us is amazing. We had to pay a bit of a premium for the property, but in our mind it’s well worth the extra money…

MMM – Good luck with your renovation. I hope you spoil yourself with some nice upgrades…

BTW, an interesting side note is that you are probably very familiar with our area. We bought in Ancaster and our home backs onto the Dundas Valley Conservation Area. Top notch biking/hiking trails and some beautiful waterfalls….

Your current house is 2600 sq ft. The new house, at 1000 feet less, is 1600 sq ft. That is still a good size house even if you choose to have a second kid.
Biggest problem with backing onto a park is that pests will approach you asking to use the bathroom, or asking for a drink of water. If you’re grilling, be prepared for a crowd hanging about waiting to be invited for dinner.

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